SIP your way to tax savings!

The month of March is usually synonymous with mad scrambles for parking
away funds in tax saving instruments under Section 80C! Unfortunately,
investment decisions taken in a hurry dont often turn out to be wise.
More often than not, it is Life Insurance Agents who benefit from this rush for
tax savings instruments, and clients are saddled with investment avenues that
either yield sub-par returns or charge exorbitant loads and fees which are
cleverly concealed by Agents at the point of sale. Is it wise to blindly put away
your hard earned funds in Insurance Policies year on year, or is there a better
option available? Read on to know more.

What is Life Insurance?

Id like to begin by briefly clarifying what Life Insurance is and is not! Life Insurance is nothing but a
risk management tool. Investopedia defines Life Insurance as a protection against the loss of
income that would result if the insured passed away. In other words, the only purpose of Life
Insurance is to safeguard your dependents from the loss of income resulting from the potential loss of
your life, if you are the breadwinner. Is Life Insurance an important component of Financial Planning?
Yes, it most certainly is. Is it a selfless act? Yes, of course. But is it a good investment? Big
resounding No!
Most Non-Term insurance plans (that are cleverly constructed as investment plans in order to
attract higher premiums) either provide returns that do not even beat inflation, or have high fees and
charges built into the plan structure (ULIPs). As a result, folks who invest in Life Insurance end up
doing themselves and their family a great disservice neither do they receive an adequate cover, nor
do the funds invested in these policies really show any appreciable long term growth! A classic loselose scenario if there ever was one.
In a nutshell do not blindly purchase insurance policies to save taxes under 80C! The only
one who will really benefit from this decision is your Life Insurance agent

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SIP your way to tax savings!

ELSS a great alternative

An Equity Linked Savings Scheme (or ELSS) is a great
alternative to Life Insurance (or other tax savings schemes) for
the purpose of saving tax! An ELSS is essential an equity
mutual fund with a lock in period of 3 years. All investments
made in an ELSS qualify for Tax Savings under section 80(C) of
the Income Tax act.
ELSS funds offer long term capital growth by investing in a
diversified portfolio of stocks. The returns from an ELSS are not
guaranteed, but market linked. This lends an element of risk to
ELSS investing, as the capital value will fluctuate with the rise
and fall in stock prices.
Compared to other traditional tax savings schemes, an ELSS has the shortest lock-in period. While
NSC and PPF have lock in periods of 6 and 15 years respectively, most insurance policies tend to
have lock-in periods exceeding a decade. However, we advise our clients to invest in an ELSS with a
time horizon of 5 years. After all, when it comes to equities - time in the market is more important
than timing the market!
By opting for the Dividend Payout option is an ELSS, investors can receive tax free payouts from
their investment even before the maturity of the scheme. However, its worth noting that the NAV of
the scheme drops in proportion to the quantum of the dividend after the declaration, so this is not
really a dividend in its true sense but more of a partial withdrawal of funds!
Advantages of Equity Linked Savings Schemes
To summarize, the benefits of ELSS investing are as follows:

Tax benefits under Section 80C

A relatively shorter mandatory lock in period (3 years) compared to other 80C instruments
High chances of receiving tax free dividends even before maturity
Long term capital gains (on units held for 1 year or more) are completely exempt from tax
Scope for earning high returns of over 13-15% per annum if units are held for 5 years or more
Availability of the Systematic Investment Plan (SIP) mode

Chances of
receiving tax
free dividends

Tax-free LongTerm Capital

Gains

Shorter Lock in
Period (3
Years)

Tax Benefits

High Return
Potential

ELSS

SIP and ELSS a winning combo!

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Systematic
Investment
Plan Option

SIP your way to tax savings!

As we mentioned earlier, investing in equities is not risk free, and carries with it the potential for
capital erosion in the short to medium term. But while risk cannot be completely eliminated from any
investment avenue, it certainly can be managed.
In our opinion, the best way to manage the risks inherent in equity investing is to allocate a fixed sum
of money at periodic intervals, without making any attempt to time the market. By saving in this
manner, one will automatically accumulate more units of the ELSS when the markets are down (when
the units become cheaper) and lesser units when the markets are up (when the units become more
expensive) By averaging out the purchase price of their units, one can significantly reduce the risk of
losing capital when markets go down. This is called rupee cost averaging. By starting an SIP in an
ELSS, one can avail this wonderful benefit.
Put your 80C tax savings on autopilot!
This Financial Year, were on a mission to help
all our valuable clients put their 80C tax
savings on autopilot!
By starting a small 5-year SIP of Rs. 8,334 per
month in an ELSS, you can combine the unique
benefits of SIP saving with the high growth
potential of an ELSS and save taxes under 80C alongside! Its simple, convenient and will definitely
reap rich rewards over the long term.
By planning ahead and starting a SIP of Rs. 8,334 early on in the Financial Year, you will have
successfully avoided the yearend rush for tax-savings instruments that more often than not lead to
poor investment decisions. Your tax savings will continue year on year while your capital grows at a
far better rate than other traditional instruments such as Bank FDs, PPF accounts, NSCs or moneyback insurance policies.
This is how SIPs in our top 4 recommended ELSS funds have performed over the past 5 years.

ELSS Name

5 Year SIP
Annualized)

Returns

(Compound

A monthly SIP of Rs. 8,334 would have

grown to5

ICICI Prudential Tax Plan

11.86%

6,78,088

Reliance Tax Saver

12.09%

6,82,278

HDFC Tax Saver

12.20%

6,84,294

Franklin India Tax Shield

13.15%

7,02,012

The important thing to note here is that the NIFTY (Indias benchmark index) has grown only 3%
year on year (on average) from 4747 to 5528 in this corresponding period! This is the magic of rupee
cost averaging. Even though the stock markets have not performed well, ELSS investors benefited
from the VOLATILITY that the market exhibited between 2008 and 2013.
In other words - once you start a SIP, you need not worry about whether the markets will deliver
outstanding growth in the next 5 years. As long as theres volatility in the market (and there always
will be!), the magic of rupee cost averaging will always be at play, ensuring that your hard earned
money grows at a good pace.

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SIP your way to tax savings!

Please take a look at the table below. We have illustrated how a small 5 year monthly SIP of
Rs. 8,334 could lead to total benefits amounting to Rs. 3.12 Lacs over a 5 year period! (tax
savings and capital growth combined)
We have assumed a modest SIP return of 11% for the purpose of this calculation. (To put things in
perspective, the average 5 year SIP return of the top 4 ELSS funds recommended by FinEdge
Advisory has been 12.33% in the same period, in spite of the poor stock market performance)
Monthly SIP Amount

8,334

Duration in Months

60

Funds Invested

5,00,040

Expected Return

11%

Fund Value after 5 Years

6,62,704

Capital Growth

1,62,664

Tax Savings (assuming highest tax bracket of 30%)

1,50,000

Total Benefits (Capital Growth + Tax Savings)

3,12,664

SIP in an ELSS versus other 80C instruments

We invite you to take a look at how a SIP in an ELSS fares against other 80C instruments...
Tax Saving
Option

Min.
Investment
500

Lock In
3 years (recommended
- 5 years)

Expected
Returns
12% (Market
Linked)

ELSS - SIP
PPF

500

15 years

8.70%

Tax Free

No

NSC

100

6 years

8%

Taxable

No

Bank Deposit
Endowment
Insurance

100
Depends upon
product
Depends upon
product

5 years

8.5% to 8.8%

Taxable

No

Usually above 10 years

At least 3 years but
usually longer

6-6.5%
8-9% (Market
Linked)

Tax Free

No

Tax Free

No

ULIP

Taxability of
Returns

Systematic Option
Available?

Tax Free

Yes

In conclusion, we feel that its a real no-brainer! A SIP in an ELSS is the best way to save taxes under
Section 80C. All you need to do is select a fund, fill out a KYC form (if you arent already KYC
compliant), sign an application form and attach an ECS mandate with a cheque favouring the
scheme.
Your Financial Planning Manager can help you start your SIP in an ELSS. Call us on (011) 4507 2800
or write in at servicedesk@finedge.in today to get this important aspect of your annual financial
planning on track! Dont delay remember, time is money
"A FinEdge Knowledge Report.
All information contained in this document has been obtained by FinEdge Advisory Private Limited from sources believed by it to be accurate and
reliable. Although reasonable care has been taken to ensure that the information herein is true, such information is provided as is without any
warranty of any kind, and FinEdge Advisory Private Limited. In particular, makes no representation or warranty, express or implied, as to the
accuracy, timeliness or completeness of any such information.
All information contained herein must be construed solely as statements of opinion, and FinEdge Advisory Private Limited shall not be liable for
any losses incurred by users from any use of this document or its contents in any manner. Opinions expressed in this document are not the
opinions of our company, FinEdge Advisory Private Limited, and should not be construed as any indication of credit rating or grading of FinEdge
Advisory Private Limited for any instruments that have been issued or are to be issued by any entity.
Email : info@finedge.in"

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